What does it mean when nuclear plant owners tell people that their plants are struggling to make money in competitive markets as currently structured? They … [Read More...] about Why can’t existing nuclear plants make money in today’s electricity markets?
Aside: While researching this article, I learned that the word “will” is considered to be a forward looking word expressing uncertainty about future performance, at least in the eyes of the Federal Trade Commission. The effect of that interpretation of the word is that a statement that sounds like a promise, like “These transactions will save Alliant Energy’s Iowa customers nearly $300 million in energy costs, on a net present value basis, over 21 years” is within safe harbor provisions. “Will save” really means that “if markets behave as we expect…” or “customers may save as much as…” End Aside.
As a result of cancelling the power purchase agreement that guarantees NextEra a predictable income stream from selling its 70% of DAEC’s capacity and energy produced, NextEra will be closing the plant by the end of 2020. The current power purchase agreement runs through 2025.
Just before telling the press, NextEra informed its 550 plant employees that many of their jobs would be eliminated at least five years earlier than previously expected. Though the company stated that it will do everything that it can to smooth the transition on its valued employees, Duane Arnold is a major employer in a rural area. Fortunately for DAEC employees preferring to remain in the area, Cedar Rapids, the home of such high technology employers as Rockwell Collins, is about a half an hour away.
Meredith Angwin at Yes Vermont Yankee has documented the local effects of closing Vermont Yankee, a similar plant with a similar work force in a similar small town that was also owned by a large merchant power generator with a reputation for taking pretty good care of employees. Reading the below listed posts might provide a more accurate picture of what the future might hold for those people who are intensely interested because they or their loved ones are directly affected.
Other affected entities
Also on the same morning as the employees and press were informed, the two electric power cooperatives that together own 30% of the plant and distribute 30% of its electricity output to members were also informed that their members’ investments in the plant would be worth less than originally expected. Instead of owning part of an asset providing 184 MWe roughly 90% of the time, their members would share 30% of an unknown liability.
The cooperatives would also have to find other sources of equally reliable power or depend on the fluctuations of the wholesale power market. Most likely, they will have to do both to some degree.
Neither of the two partners, Central Iowa Power Cooperative and Corn Belt Power Cooperative, were a part of the power purchase agreement. As a result, neither of them was invited when Alliant and NextEra agreed to stop power purchases from DAEC to make room for subsidized wind. According to Peter Robbins, a spokesman for NextEra, his company has “a close relationship with CIPCO and Corn Belt and are sitting down with them this week to talk about the path forward.”
Under currently announced plans, there will be no advance payment for the cooperatives. They will also be unable to take advantage of any tax deductions associated with the early closure of a not yet fully depreciated asset. Recently made investments in upgrades and repairs associated with the 2014 operating license extension and the Fukushima response actions required by the NRC will be paid off over years, even after the plant has stopped operating.
Kathy Taylor the Vice President, Corporate Relations for Corn Belt Power Cooperative provided the following comment.
Corn Belt Power sells its share of the output of DAEC to our wholesale power supplier, Basin Electric Power Cooperative, Bismarck, N.D., and therefore has informed Basin Electric of Next Era Energy’s announcement. Any negative impact of the 2020 closure has been mitigated to our member cooperatives through Corn Belt Power’s membership in Basin Electric, which has adequate supplies of generation to cover all of our member cooperatives’ needs.
With an immediate focus to minimize any financial impact that early closure may have on our membership, Corn Belt Power plans to modify its internal accounting procedures to reflect the change in the plant closure date. The cooperative is still studying the financial impact.
The Central Iowa Power Cooperative (CIPCO) issued a press release on Friday expressing some concerns about the decision to close the plant.
Leaders at Central Iowa Power Cooperative (CIPCO) expressed guarded optimism about today’s announcement by Florida-based NextEra Energy Resources (NEER) and Alliant Energy that a 2020 closure of the Duane Arnold Energy Center (DAEC) will result in a win for the state of Iowa.
With earlier than anticipated decommissioning costs and the loss of a key source of clean, reliable, and safe energy, leaders at CIPCO are concerned about the near-term, adverse effects to consumer-members for many of Iowa’s electric cooperatives and municipalities. CIPCO is 20 percent owner of the nuclear plant at Palo.
Earlier in the year, NEER [NextEra Energy Resources] announced a likely 2025 end to energy production when Alliant Energy’s power purchase agreement (PPA) with NextEra Energy comes to an end, despite being licensed to operate until 2034.
“DAEC has been a valuable economic engine in this state for over 40 years. We recognize economics are driving NextEra Energy’s decision to prematurely close the plant. The immediate impact on our member electric cooperatives and municipalities as well as the state’s economy remain a top concern for CIPCO,” said CIPCO’s Executive Vice President and CEO Bill Cherrier.
Why are the economics favorable to closing Duane Arnold?
Fortunately for the electric cooperatives that have been partners in the plant since it began operating in 1974, their local region is oversupplied with low-priced wind most of the time. Partly encouraged by the deadlines in the 2015 plan to phase out wind energy production tax credits, there has been a recent boom in Iowa wind projects. In order to earn the generous federal tax credits, owners of the new or repowered projects need room in the market for their output. They find it by offering power for less than its full cost of production.
Though NextEra is one of the primary owners of that new wind energy, Warren Buffett’s MidAmerican Energy is another major player. In 2016, it announced that it would be investing $3.6 billion in new wind projects in order to maximize its harvest of production tax credits before eligibility expired.
Duane Arnold, a mature nuclear plant that reliably produces 615 MWe of emission-free electricity, is apparently considered to be a grid block that is in the way of fully using the cheaply priced wind power.
Alliant Energy, which transmits and distributes the electricity it purchases to nearly half a million retail customers, had filed an integrated resource plan last year that did not include Duane Arnold as one of its contracted power sources. That document signaled to NextEra that the power purchase contract that currently keeps Duane Arnold operating profitably by providing a guaranteed price for energy and capacity wasn’t planned for renewal.
Facing the prospect of having to compete in the wholesale market for sales and recognizing the oversupplied nature of that market whenever the wind is blowing, NextEra indicated to Alliant that it was open to an offer to forgo part of its future income. The two parties agreed that a September 2020 payment from Alliant of $110 million would be sufficient for both parties to agree to stop buying and selling nuclear electricity generated in Iowa.
Alliant has applied to the Iowa Utilities Board for permission to recover the cost of the cancellation payment in its rates. It believes that the new arrangement should save each of its customers a little more than $3 per month in the fuel adjustment portion of their bills over the next 21 years – as long as natural gas prices and availability follow current predictions.
Is there any chance of saving the plant?
Plant closings are never final until the fuel is removed, the NRC has been notified that the owner intends for the shutdown to be permanent, and the operating license has been amended to be a possession-only license. However, once an owner has announced its intention to close a plant, there have been few instances so far of a decision reversal.
This case may be a little different due to the presence of minority owners who are only guardedly optimistic that the closure will be financially beneficial and due to the fact that the Iowa Utilities Board is unlikely to be as biased against nuclear energy as the California Public Utilities Commission. Before the deal goes through, the utilities board must approve the contract cancellation payment and the minority owners should have a voice in the proceedings.
It’s also possible for the markets and the regulatory environment to shift enough during the next two years to make it economically beneficial to keep Duane Arnold operating, perhaps under a different ownership structure.
In the meantime, I want to express my sadness and empathy for the people who are employed at Duane Arnold and who had every reason to believe that their jobs were secure and that their families would have long term stability in their chosen homes.
What does it mean when nuclear plant owners tell people that their plants are struggling to make money in competitive markets as currently structured?
They are attempting to more precisely state what is often misleadingly dismissed by journalists as “nuclear plants cannot compete.” The more commonly used statement gives the impression that nuclear plants produce more expensive electricity than other sources. That is factually untrue. On a cost per kilowatt-hour delivered to the grid, nuclear plants are consistently one of the lowest cost sources available, just above power from paid off hydroelectric dams.
According to a paper titled Nuclear costs in context issued by the Nuclear Energy Institute in August 2017, the average total generating cost for a US nuclear plant in 2016 was less than $34 per megawatt-hour. That number was 15% lower than 2012’s peak average cost, which happened when Fukushima Frenzy-related costs were being imposed on the industry.
If nuclear plants are still producing electricity for such a low average cost, why can’t they compete?
Existing nuclear plants were designed and built during a period when electric utility companies were legal monopolies with both an obligation to serve and prices established with a government-approved cost plus rate of return. When today’s nuclear plants were built, no one considered the idea that competitors might appear that would decide to occasionally give electricity away for free in hopes of capturing additional market share.
Though reactors were designed to be able to vary their output at the modest rate that loads changed, they operate most reliably and at the lowest cost per unit of electricity generated if they are run steadily at their fully rated, optimized power. If they reduce power too quickly and remain at low power too long, a short-lived neutron absorbing isotope called xenon-135 builds up inside fuel rods. Xenon is such a strong neutron absorber than it can make a reactor sub-critical, even with all control rods fully withdrawn from the core.
Xenon accumulation after a shutdown from full power can prevent a restart until it decays away. Since xenon-135 has a 9.2 hour half life, the xenon precluded start-up period can last from a few hours to several days, depending on factors relating to the reactor’s fuel cycle.
Being shutdown and unable to generate power during a xenon transient can be substantially more detrimental to revenue generation than simply accepting low or negative pricing for a brief period. Though it’s technically straightforward to design and build reactors that can avoid xenon precluded start-ups throughout most of their core lives, it would take a lengthy, expensive, and financially risky redesign and licensing effort to backfit that capability into already operating power plants.
As a result, reactors still operate at full power as much as possible and generate 20% of the electricity sold in the U.S. That is pretty impressive considering that there are less than 100 operating units with total rated capacity that is well under 10% of the total generating capacity of the US electrical grid. In 2017, the average capacity factor of US plants exceeded 92% and the total electric energy generated and sold was close to 800 billion kilowatt-hours.
The economic struggle for nuclear plants is caused by too often having to sell their steady output at prices near or even below zero dollars.
Pricing that is below the true cost for all generators is caused by temporary oversupply situations. These arise as a result of a combination of favorable weather, seasonal excesses of natural gas, and weather/time-of-day driven variations in customer demand. Some of the generators bidding during these periods are eligible for production tax credits that are not tied to demand.
If the generator produces power, even if no one wants it, the generator earns a payment of $23 per MWhr from the federal government. Unlike similar subsidy programs for certain farm products, the government doesn’t actually take delivery and store the product it has subsidized, it leaves that job to the market and shares the low price pain with all suppliers. Because the people who receive these production tax credits have political pull, there is a great hue and cry if anyone tries to curtail their unwanted output.
Permanent nuclear plant shutdowns help alleviate temporary periods of excess supply, but they also narrow – or eliminate – the margin between supply and demand during periods when the weather is contrary, gas demand rises for heating & industry, and the time of day is when nearly everyone wants to use power.
If keeping nuclear plants in the mix reduces risk, why is there so much opposition to all proposed plans?
Discussions about the grid, the electricity market, and pricing mechanisms are fascinating and attract intense interest for a very limited number of people. For most people, the issues are too complicated to delve into with much enthusiasm. If they take any interest at all, it is a result of active efforts to brand and politic with sound or text bites in order to obtain a favorable decision.
For competitors in the market, the nuclear plant shutdowns represent substantial revenue opportunities. For people who have been campaigning against nuclear energy for years or even decades, there are no tears and no sympathy for struggling nuclear plants or for the people who are employed to operate and maintain them.
Despite high level attention and announced intentions to address the problem, the US government is still paying large subsidies to companies that install and operate weather-dependent power sources even in areas that are already subjected to increasingly frequent periods of oversupply during some parts of the day when the weather is favorable. Though the subsidies are currently scheduled to expire, there have been close to a half a dozen last minute extensions in the past.
Without close attention and ready political actions, it seems likely that there will be another successful, last minute effort to save the subsidies.
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